On the international front, the BRICS bloc made up of Brazil, Russia, India, China and South Africa alongside six other countries including Iran, Saudi Arabia, the UAE, Egypt, Argentina and Ethiopia are pushing the agenda to de-dollarizing their respective economies.
A number of these countries are witnessing a shortage of dollars and the consistent hike of the Fed Fund rates is causing a devaluation of their currencies against the greenback.
In line with this new plan, the United Arab Emirates (UAE) has commenced settling oil trades with India’s top
refiners in Rupees while Argentina has announced that it would start to pay for imports from China in Yuan instead of dollars.
The BRICS have commenced slowly selling down their U.S Treasury Bonds and they have collectively sold off US$18.9bn in the last month in order to defend their currency against the U.S Dollars.
On the domestic front, the former CBN governor Mallam Sanusi Lamido at various times lamented the increasing use of the dollar for domestic transactions. Many big schools and hotels prefer to be paid in dollars rather than the naira and it is not unusual to see some wealthy Nigerians spray dollars at parties.
The country has made efforts previously to reduce its dependence on the U.S dollar with a bilateral currency swap between Nigeria and China valued at ¥16bn (circa US$2.5bn) which commenced in 2018 with a 2021 expiration plan but has been renewed for another three years. So far, the apex bank, Central Bank of Nigeria (CBN) has been reported to have auctioned off ¥7.04bn as of June 2022.
The swap deal has not been successful enough to reduce the demand for U.S. dollars even with China being the highest source of the country’s imports amounting to N1.27trn as of H1 2023.
A number of reasons could have accounted for this. Firstly, the size of the swap (N720bn over 3 years) compared with N1.27trn worth of imports from China in H1 2023 alone, is not large to have any appreciatory impact on the naira.
Again, Major Chinese exporters have not been as enthusiastic about the deal as the CBN. The general reasoning here is that major Chinese exporters prefer to receive payments in dollars rather than in Renminbi.
Given that a considerable part of their transactions is dollar-based, these Chinese exporters would rather avoid the cumbersome process of converting the Renminbi to Dollars in China.
The continuous devaluation of the naira against the dollar and the depletion of the country’s foreign reserves means it is more expedient for the CBN to look for more stringent measures to reduce its dependence on the dollar.
The country has witnessed its worst FX liquidity problems in recent years as FX supply continues to shrink amidst growing demand.
The news that a number of countries, including Nigeria, are pushing to de-dollarize their economies is significant. The dollar has been the world’s reserve currency for decades, but there are a number of reasons why countries may be looking to reduce their reliance on it.
One reason is that the US dollar has become increasingly volatile in recent years. This is due to a number of factors, including the US Federal Reserve’s interest rate hikes and the ongoing war in Ukraine. Volatility in the dollar can make it difficult for businesses and individuals to plan for the future and can lead to uncertainty in the economy.
Another reason for de-dollarization is that the US dollar is seen as being biased towards US interests. This is because the US government has a lot of control over the dollar and can use it to its advantage. For example, the US government has imposed sanctions on countries that it opposes, which has made it difficult for those countries to use the dollar.
De-dollarization could have a number of impacts on the Nigerian economy. On the positive side, it could reduce Nigeria’s exposure to US monetary policy shocks and make the economy more stable. It could also boost domestic businesses by making it easier for them to compete with foreign businesses.
On the negative side, de-dollarization could make it more difficult for Nigeria to attract foreign investment and trade with international partners. It could also lead to increased inflation in Nigeria.
Overall, the impact of de-dollarization on the Nigerian economy would depend on a number of factors, including the speed and scale of the process, the availability of alternative currencies, and the government’s policies to support the transition.
The CBN’s previous efforts to reduce Nigeria’s dependence on the dollar have not been successful. This is likely due to a number of factors, including the size of the swap deal, the reluctance of Chinese exporters to accept payments in renminbi, and the continuous devaluation of the naira against the dollar.
The CBN needs to take more stringent measures to reduce Nigeria’s dependence on the dollar. This could include developing alternative payment systems, promoting the use of the naira for trade and investment, and working with other countries to reduce their reliance on the dollar.
The de-dollarization of Nigeria’s economy is a complex issue with a number of potential impacts. The CBN needs to carefully consider all of these factors before taking any steps to implement de-dollarization.
This global obsession with de-dollarization is a naive proposition as it overlooks the unparalleled stability and global acceptance not only of the US dollar, but the financial, legal, and political institutions that underpin it which have made the US dollar essential for international trade and investment worldwide.
Instead of focusing solely on de-dollarization, a more balanced approach for Nigeria and any other country globally would be to diversify the economy away from oil and other commodities, grow domestic manufacturing and service industries, and strengthen domestic political institutions and financial infrastructure. Enhancing economic resilience and competitiveness of the local Nigerian economy can help in mitigating the impacts of external shocks, regardless of the currency in use for foreign trade.
De-dollarizing foreign reserves in favor of the Chinese Yuan, the Russian Rubble, or any other foreign currency does little to address the fundamental issues behind the frailty of the Nigerian domestic economy.